final sif risk

8/8/2019 Final Sif Risk

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Presented To:Presented To:

Sir Nazik HussainSir Nazik Hussain


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G roup Members:G roup Members:

Syed Sajjad Haider Syed Sajjad Haider Roll No. 35Roll No. 35

Farhan Sarwar Farhan Sarwar Roll No.07Roll No.07


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Risk Management in CommercialRisk Management in Commercial

BanksBanks

Guidelines by State Bank of PakistanGuidelines by State Bank of Pakistan


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D efining RiskD efining Risk

financial risk in a banking organization isfinancial risk in a banking organization ispossibility that the outcome of an action or possibility that the outcome of an action or event could bring up adverse impacts.event could bring up adverse impacts.

Expected Losses:Expected Losses:Unexpected LossesUnexpected Losses


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Risks in the BankRisks in the Bank

Credit RiskCredit RiskMarket RiskMarket RiskLiquidity RiskLiquidity Risk

Operational RiskOperational RiskCompliance RiskCompliance RiskReputation RisksReputation Risks


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Risk ManagementRisk ManagementIt involves identification, measurement, monitoring andIt involves identification, measurement, monitoring andcontrolling risks to ensure that;controlling risks to ensure that;

--The individuals who take or manage risks clearlyThe individuals who take or manage risks clearlyunderstand it.understand it.

--The organizations Risk exposure is within the limitsThe organizations Risk exposure is within the limitsestablished by Board of D irectors.established by Board of D irectors.

--Risk taking D ecisions are in line with the business strategyRisk taking D ecisions are in line with the business strategyand objectives set by BO D .and objectives set by BO D .

--The expected payoffs compensate for the risks takenThe expected payoffs compensate for the risks taken--Risk taking decisions are explicit and clear.Risk taking decisions are explicit and clear.--Sufficient capital as a buffer is available to take riskSufficient capital as a buffer is available to take risk

Optimize riskOptimize risk- -rewards traderewards trade- -offsoffs


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W hy Manage Risks?W hy Manage Risks?

It supports the achievement of objectivesIt supports the achievement of objectives

It allows higher risks to be takenIt allows higher risks to be takenIt reduces the chance of serious errorsIt reduces the chance of serious errorsRisks exist at all levels:Risks exist at all levels: corporate/strategic, faculty,corporate/strategic, faculty,departmental, functional, personal, project . . . . So wedepartmental, functional, personal, project . . . . So we

all need to be risk managers in a way appropriate toall need to be risk managers in a way appropriate toour own responsibilitiesour own responsibilities


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Risk Management Acti itiesRisk Management Acti ities

Strategic Level:Strategic Level:

Senior management and BO DSenior management and BO DMacro Level:Macro Level:

Business area or across business linesBusiness area or across business lines

Micro Level:Micro Level:Front office and loan origination functionsFront office and loan origination functions


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Risk Management ProcessRisk Management Process

It Involves:It Involves:

Identification of riskIdentification of riskMeasurement of riskMeasurement of riskMonitoring the riskMonitoring the riskControlling the riskControlling the risk


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Risk Management in BanksRisk Management in Banks

Board & senior management oversightBoard & senior management oversightRisk Management frameworkRisk Management framework

Integration of risk ManagementIntegration of risk ManagementBusiness line accountabilityBusiness line accountabilityRisk Evaluation/MeasurementRisk Evaluation/Measurement

Independent reviewIndependent reviewContingency planningContingency planning


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Credit Risk ManagementCredit Risk Management


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W hat is Credit Risk?W hat is Credit Risk?

CreditCredit riskrisk arisesarises fromfrom thethe potentialpotential thatthat ananobligor obligor isis either either unwillingunwilling toto performperform onon ananobligationobligation or or itsits abilityability toto performperform suchsuch

obligationobligation isis impairedimpaired resultingresulting inineconomiceconomic lossloss toto bankbank


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Sources of Credit LossesSources of Credit Losses

Outright D efault:Outright D efault: due to inability or unwillingness of adue to inability or unwillingness of acustomer or counter party to meet commitments in relation to lending,customer or counter party to meet commitments in relation to lending,trading, settlement and other financial transactions.trading, settlement and other financial transactions.

Economic Exposure:Economic Exposure: This encompasses opportunityThis encompasses opportunitycosts, transaction costs and expenses associated with a noncosts, transaction costs and expenses associated with a non- -performing assetperforming asset

Credit risk may arise liquidity problemsCredit risk may arise liquidity problems


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Credit Risk Arises From;Credit Risk Arises From;

Banks dealings with individuals, corporate,Banks dealings with individuals, corporate,financial institutions and sovereign.financial institutions and sovereign.Loans are the largest and obvious source of Loans are the largest and obvious source of credit riskcredit risk


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Components Of Credit RiskComponents Of Credit RiskManagementManagement ::


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Components of Credit RiskComponents of Credit Risk

Management Frame workManagement Frame work

11)Board)Board andand senior senior managementsmanagements

oversightoversight. .22)Organigational)Organigational StructureStructure33)Systems)Systems andand proceduresprocedures for for identification,identification,

acceptance,acceptance, measurement,measurement, monitoringmonitoring andandcontrolcontrol riskrisk


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Board and ManagementsBoard and Managements

ResponsibilitiesResponsibilities

Their over responsibility is to approveTheir over responsibility is to approve

banks credit risk strategy and significantbanks credit risk strategy and significantpolicies relating to credit risk and itspolicies relating to credit risk and itsmanagement which should be based onmanagement which should be based onbanks over all business strategy.banks over all business strategy.The overall strategy should be reviewedThe overall strategy should be reviewedannually.annually.


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Boards ResponsibilityBoards Responsibility


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D elineate banks risk tolerance in relationD elineate banks risk tolerance in relationto credit risk.to credit risk.

Ensure that banks overall credit riskEnsure that banks overall credit riskexposure is maintained at prudent levelsexposure is maintained at prudent levelsand consistent with available capital.and consistent with available capital.Ensure that management and peopleEnsure that management and peopleresponsible for the function have soundresponsible for the function have soundexpertise and knowledge.expertise and knowledge.


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Ensure that appropriate plans andEnsure that appropriate plans andprocedures for credit risk management areprocedures for credit risk management arein place.in place.


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Credit Risk Strategy Should DefineCredit Risk Strategy Should Define

Institutions plan to grant credit based onInstitutions plan to grant credit based on

various;various;a)a) Client segments and products.Client segments and products.b)b) Economic sector Economic sector

c)c) G eographic locationG eographic locationd)d) Currency and maturityCurrency and maturity


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Credit Risk Strategy Should DefineCredit Risk Strategy Should Define

Target market in each lending segment.Target market in each lending segment.Level of concentration/diversification.Level of concentration/diversification.

Pricing Strategy.Pricing Strategy.


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Credit Strategy Should:Credit Strategy Should:

Provide continuity in approach.Provide continuity in approach.Take into account cyclic aspect of Take into account cyclic aspect of

country's economy.country's economy.Consider Resulting shift in quality andConsider Resulting shift in quality andcomposition of credit portfolio.composition of credit portfolio.

Be reviewed periodically and amended soBe reviewed periodically and amended soit may be viable in long term and throughit may be viable in long term and throughvarious economic cycles.various economic cycles.


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Senior ManagementSenior ManagementResponsibility:Responsibility:


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Senior Management Should De elopSenior Management Should De elop

Credit Policy and Credit administrationCredit Policy and Credit administrationProcedures.Procedures.G et them approved from board.G et them approved from board.Such Policies should provide guidance toSuch Policies should provide guidance tostaff on various types of lending.staff on various types of lending.


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The Policy Should Include:The Policy Should Include:

D etailed and Formulized credit evaluationD etailed and Formulized credit evaluationProcess.Process.Credit approval authority at variousCredit approval authority at varioushierarchy levels including authority for hierarchy levels including authority for approving exceptions.approving exceptions.Risk identification, measurement,Risk identification, measurement,

monitoring and control.monitoring and control.Credit origination, credit administration,Credit origination, credit administration,and loan documentation procedures.and loan documentation procedures.


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ContinuedContinued

Roles and responsibilities of staff.Roles and responsibilities of staff.G uidelines on management of problemG uidelines on management of problemloans.loans.


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For Policy to be Effective:For Policy to be Effective:

These should be;These should be;Clear Communicated down the lineClear Communicated down the line

Any significant deviation should be Any significant deviation should be

reported to top management.reported to top management.Corrective Actions to be taken.Corrective Actions to be taken.


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Organizational Structure:Organizational Structure:


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A sound risk management structure is very A sound risk management structure is veryimportant to keep the banks overall riskimportant to keep the banks overall riskexposure within the parameters set by theexposure within the parameters set by theboard.board.Bank may choose different structures.Bank may choose different structures.It should correspond with institutions size,It should correspond with institutions size,complexity, and diversification of itscomplexity, and diversification of itsactivities.activities.


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Components of OrganizationalComponents of Organizationalstructure:structure:

CRMCCRMCSegregation of dutiesSegregation of dutiesCRM DCRM D


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CRMCCRMC

Stands for Credit Risk ManagementStands for Credit Risk ManagementCommittee.Committee.

Comprises of;Comprises of;a)a) Head of CRM D .Head of CRM D .b)b) Credit departmentCredit department

c)c) Treasury.Treasury.


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Reports to banks risk managementReports to banks risk managementcommittee.committee.Should be empowered to oversee creditShould be empowered to oversee creditrisk taking activities and overall credit riskrisk taking activities and overall credit riskmanagement functions.management functions.


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Segregation of D uties:Segregation of D uties:

Loan origination function, credit policyLoan origination function, credit policyformulation, credit limit setting, monitoringformulation, credit limit setting, monitoringof credit exceptions, and documentationof credit exceptions, and documentationfunctions should be separated.functions should be separated.


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CRM DCRM D

Stands for Credit Risk ManagementStands for Credit Risk ManagementD epartment.D epartment.


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Functions of Credit RiskFunctions of Credit RiskManagement D eptt.Management D eptt.

To ensure that risks remain within theTo ensure that risks remain within thepredetermined boundaries.predetermined boundaries.Establish systems and procedures relatingEstablish systems and procedures relating

to risk identification, M IS, monitoring of to risk identification, M IS, monitoring of loans, investment portfolio quality, andloans, investment portfolio quality, andearly warning.early warning.


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Systems and ProceduresSystems and Procedures

Credit OriginationCredit OriginationLimit SettingLimit Setting

Credit AdministrationCredit AdministrationMeasuring credit riskMeasuring credit riskCredit risk monitoring and control.Credit risk monitoring and control.

Risk reviewRisk reviewManaging problem creditsManaging problem credits


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Credit OriginationCredit Origination

a)a) Credit assessment of the borrowers industry,Credit assessment of the borrowers industry,and macro economic factors.and macro economic factors.

b )

b ) The purpose of credit and source of repayment.The purpose of credit and source of repayment.c)c) The track record / repayment history of The track record / repayment history of

borrower.borrower.d)d) Assess/evaluate the repayment capacity of the Assess/evaluate the repayment capacity of the

borrower.borrower.e)e) The Proposed terms and conditions andThe Proposed terms and conditions and

covenants.covenants.f)f) Adequacy and enforceability of collaterals. Adequacy and enforceability of collaterals.g)g) Approval from appropriate authority Approval from appropriate authority


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Limit SettingLimit Setting

Limit Setting D epends on;Limit Setting D epends on;

Credit strength of the obligor Credit strength of the obligor

G enuine requirement of creditG enuine requirement of creditEconomic conditionsEconomic conditionsInstitution's risk toleranceInstitution's risk tolerance


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Credit AdministrationCredit Administration

A credit administration unit performs A credit administration unit performsfollowing functions:following functions:

a)a) D ocumentationD ocumentationb)b) Credit disbursementCredit disbursementc)c) Credit monitoringCredit monitoringd)d) Loan repaymentsLoan repaymentse)e) Maintenance of credit filesMaintenance of credit filesf)f) Collateral and security documents.Collateral and security documents.


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Measuring Credit RiskMeasuring Credit Risk

Internal risk ratingInternal risk ratingRating reviewRating review

Assigned at the time of inception of loan Assigned at the time of inception of loanand reviewed at last annually.and reviewed at last annually.


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Credit Risk Monitoring And ControlCredit Risk Monitoring And Control

Checking credit quality and takingChecking credit quality and takingremedial measure when deteriorationremedial measure when deteriorationoccurs.occurs.


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K ey indicators of Credit Quality of K ey indicators of Credit Quality of Loans:Loans:

Financial Position an business position.Financial Position an business position.Conduct of accountsConduct of accounts

Loan CovenantsLoan CovenantsCollateral valuationCollateral valuation


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Risk Re iewRisk Re iew

The purpose is to assess creditThe purpose is to assess creditadministration process, and overall qualityadministration process, and overall qualityof loans.of loans.Must be performed on annual basis. MoreMust be performed on annual basis. Morefrequent review can be conducted wherefrequent review can be conducted wherebank is not familiar with the customer.bank is not familiar with the customer.For consumer loans it may not be neededFor consumer loans it may not be neededexcept for deterioration and exceptions.except for deterioration and exceptions.


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Managing Problem CreditManaging Problem Credit

Problems should be identified ahead of time.Problems should be identified ahead of time.

Problem Loan Management ProcessProblem Loan Management ProcessNegotiations and follow upNegotiations and follow up

W orkout remedial strategiesW orkout remedial strategiesReview of collateral and security documentReview of collateral and security documentStatus report and reviewStatus report and review


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Managing Market RiskManaging Market Risk


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Market RiskMarket Risk

It is the risk that the value of on and off It is the risk that the value of on and off balancebalancesheet positions of a financial institution will besheet positions of a financial institution will beadversely affected by movements in market ratesadversely affected by movements in market rates

or prices.or prices.

Such as;Such as;

1.1.Interest rates

Interest rates2.2. Foreign exchange ratesForeign exchange rates

3.3. Equity pricesEquity prices4.4. Credit spreads and/or commodity pricesCredit spreads and/or commodity prices


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Interest Rate RiskInterest Rate Risk

Interest rate risk arises when there is aInterest rate risk arises when there is amismatch between positions, which aremismatch between positions, which aresubject to interest rate adjustment.subject to interest rate adjustment.

Assessment of Interest Rate Risk: Assessment of Interest Rate Risk:1.1. Earning perspectiveEarning perspective2.2. Economic value perspectiveEconomic value perspective


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Foreign xchange RiskForeign xchange Risk

It is the current or prospective risk toIt is the current or prospective risk to

earnings and capital arising from adverseearnings and capital arising from adversemovements in currency exchange rates.movements in currency exchange rates.


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Banks are exposed to risk;Banks are exposed to risk;

W hich arises from the maturityW hich arises from the maturitymismatching of foreign currency positionsmismatching of foreign currency positionsD

efault of the counter parties or settlementD

efault of the counter parties or settlementriskriskTimeTime--zone riskzone risk


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Eq uity Price RiskEq uity Price Risk

It is the risk to earning or capital thatIt is the risk to earning or capital thatresults from adverse changes in theresults from adverse changes in thevalue of equity related portfolios of avalue of equity related portfolios of a

financial institution.financial institution.

Types of Equity Price risk:Types of Equity Price risk:

1.1. Systematic RiskSystematic Risk2.2. Unsystematic RiskUnsystematic Risk


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E lements of Market RiskE lements of Market RiskManagementManagement


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Board and Senior ManagementBoard and Senior Management

O ersightO ersightResponsibilities of board of directors:Responsibilities of board of directors:1.1. Overall risk toleranceOverall risk tolerance

2.2. Consistency with existing capitalConsistency with existing capital3.3. Sound expertise and knowledgeSound expertise and knowledge4.4. D evotion of adequate resources to riskD evotion of adequate resources to risk

management functionmanagement function


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E lements of Risk StrategyE lements of Risk Strategy

1.1. D etermine the level of market riskD etermine the level of market risk2.2. D evelop a strategy for market riskD evelop a strategy for market risk- -takingtaking

3.3. Consider economic and marketConsider economic and marketconditionsconditions4.4. Periodically review the strategy andPeriodically review the strategy and

effectively communicate to relevant staff effectively communicate to relevant staff


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Organizational StructureOrganizational Structure

1.1. Risk Management CommitteeRisk Management Committee

2.2. Asset Asset- -Liability Management CommitteeLiability Management Committee(ALCO)(ALCO)3.3. The Middle OfficeThe Middle Office


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Responsibilities of RiskResponsibilities of RiskManagement CommitteesManagement Committees

1.1. D evise policies for identification,D evise policies for identification,measurement, monitoring and controlmeasurement, monitoring and controlrisk.risk.

2.2. Adequate recourse allocation for risk Adequate recourse allocation for riskmanagement.management.

3.3. Effective communication of all policies toEffective communication of all policies to

relevant staff.relevant staff.4.4. Review & articulate funding policy.Review & articulate funding policy.5.5. M IS maintaining relating to risk reporting.MIS maintaining relating to risk reporting.


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Risk MeasurementRisk Measurement

The measurement system ideally should:The measurement system ideally should:1.1. Assess all material risk factors Assess all material risk factors

2.2. Utilize generally accepted financialUtilize generally accepted financialconcepts and risk managementconcepts and risk managementtechniquestechniques

3.3. Have well documented assumptions andHave well documented assumptions andparametersparameters


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Value at RiskValue at Risk

A generally accepted tool for measuring A generally accepted tool for measuringmarket risk inherent in trading portfolios.market risk inherent in trading portfolios.

VAR summarizes the predicted maximumVAR summarizes the predicted maximumloss over a target horizon within a givenloss over a target horizon within a givenconfidence level, using Varianceconfidence level, using Variancecovariance approach or Historicalcovariance approach or HistoricalSimulation.Simulation.


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Risk ControlRisk Control

Banks internal control structure ensures theBanks internal control structure ensures theeffectiveness of process relating to market riskeffectiveness of process relating to market riskmanagement.management.

K ey elements of internal control process include:K ey elements of internal control process include:1.1. Internal Audit & ReviewInternal Audit & Review2.2. Effective Risk LimitsEffective Risk Limits3.3. Operational LimitsOperational Limits


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ManagingManaging

Liquidity Risk Liquidity Risk


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Liquidity Risk ManagementLiquidity Risk ManagementDefinition:Definition:

Liquidity is the potential for loss to anLiquidity is the potential for loss to aninstitution arising from either institution arising from either

Its inability to meet its obligationIts inability to meet its obligationTo fund in assets as they fall due withoutTo fund in assets as they fall due withoutincurring unacceptable cost or lossincurring unacceptable cost or loss


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Co nditi on of f unding thr ough marketCo nditi on of f unding thr ough market

Liquidity is the major risk for banksLiquidity is the major risk for banksBanks often meet their liquidity Requirements form marketBanks often meet their liquidity Requirements form market

Condition of funding through market depends uponCondition of funding through market depends upon

Liquidity in the marketLiquidity in the marketBorrowing institutions liquidityBorrowing institutions liquidity

In short term institutions may bear heavy cost resulting loss of

In short term institutions may bear heavy cost resulting loss of EarningEarning

In the long term the liquidity risk could result in bankruptcy of In the long term the liquidity risk could result in bankruptcy of the institutionthe institution


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1.1. Banks with Large off _balance sheetBanks with Large off _balance sheetexposures W hich rely heavily on largeexposures W hich rely heavily on largecorporate deposit have relatively high levelcorporate deposit have relatively high levelof liquidity riskof liquidity risk

2.2. Because financial risk are not mutuallyBecause financial risk are not mutuallyexclusive and liquidity risk often triggeredexclusive and liquidity risk often triggered

by result of these other financial risks suchby result of these other financial risks suchasasCredit riskCredit riskMarket risk etcMarket risk etc

C auses of Arising Liquidity Risk C auses of Arising Liquidity Risk


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Ex amples of Liquidity Risk Ex amples of Liquidity Risk

A bank increasing its credit through asset A bank increasing its credit through assetconcentration etc may be increasing its liquidityconcentration etc may be increasing its liquidityrisk as wellrisk as well

A large loan default or changes in the interest A large loan default or changes in the interestrate can adversely impact on banks liquidityrate can adversely impact on banks liquiditypositionposition

Management misjudgment the impact onManagement misjudgment the impact onliquidity of entering into a new business or liquidity of entering into a new business or product line, the banks strategic risk wouldproduct line, the banks strategic risk wouldincreaseincrease

E arly Warning Indicat ors O fE arly Warning Indicat ors O f


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E arly Warning Indicat ors O f E arly Warning Indicat ors O f Liquidity Risk Liquidity Risk

These are not always leads to liquidity problem butThese are not always leads to liquidity problem butthese have potential to involve in such problem.these have potential to involve in such problem.

a)a) A negative trend or significantly increased risk in A negative trend or significantly increased risk inany area or product line.any area or product line.

b )b ) Concentrations in either assets or liabilities.Concentrations in either assets or liabilities.c) Weakening c) Weakening in quality of credit portfolio.in quality of credit portfolio.d)d) A decline in earnings performance or projections. A decline in earnings performance or projections.e)e) Rapid asset growth funded by volatile largeRapid asset growth funded by volatile large

deposit.deposit.f)f) A large size of off A large size of off- -balance sheet exposure.balance sheet exposure.g) Worsening g) Worsening third party evaluation about the bankthird party evaluation about the bank

B oard and Seni or ManagementB oard and Seni or Management


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B oard and Seni or ManagementB oard and Seni or ManagementOversightOversight

For the effecti e li q uidity Risk management it need staff ha ing rele antFor the effecti e li q uidity Risk management it need staff ha ing rele antexpertise and efficient system and procedures.expertise and efficient system and procedures.

Duties of board of direct ors t o,Duties of board of direct ors t o,

Understand the liquidity risk profile of the bankUnderstand the liquidity risk profile of the bankTools used to manage liquidity risk.Tools used to manage liquidity risk.To position banks strategic direction and tolerance level for liquidity risk.To position banks strategic direction and tolerance level for liquidity risk.To appoint senior managers who have ability to manage liquidity risk andTo appoint senior managers who have ability to manage liquidity risk anddelegate them the required authority to accomplish the job.delegate them the required authority to accomplish the job.To continuously monitors the bank's performance and overall liquidity riskTo continuously monitors the bank's performance and overall liquidity risk

profile.profile.To ensure that liquidity risk is identified, measured, monitored, andTo ensure that liquidity risk is identified, measured, monitored, andcontrolled.controlled.


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Senior management is responsible:Senior management is responsible:

D evelop and implement procedures and practicesD evelop and implement procedures and practicesthat translate the board's goals, objectives, andthat translate the board's goals, objectives, andrisk tolerances into operating standards that arerisk tolerances into operating standards that are

well understood by bank personnel and consistentwell understood by bank personnel and consistentwith the board's intent.with the board's intent.

Remain to the lines of authority and responsibilityRemain to the lines of authority and responsibilitythat the board has established for managingthat the board has established for managingliquidity risk.liquidity risk.


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Oversee the implementation andOversee the implementation andmaintenance of management informationmaintenance of management informationand other systems that identify, measure,and other systems that identify, measure,

monitor, and control the bank's liquiditymonitor, and control the bank's liquidityrisk.risk.

Establish effective internal controls over Establish effective internal controls over the liquidity risk managementthe liquidity risk management

process.process.

Senior management is responsible:Senior management is responsible:


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c. Di ersification& Stability of Liabilities:c. Di ersification& Stability of Liabilities:The funding concentration exists when a single but significant factor hasThe funding concentration exists when a single but significant factor has

potential to withdraw funds. So, in this withdraw funds. So in thispotential to withdraw funds. So, in this withdraw funds. So in thiscondition risk increase. Bank senior management make it ensure acondition risk increase. Bank senior management make it ensure adi ersified stable source of funding.di ersified stable source of funding.

Banks need to identify :Banks need to identify :o Liabilities that would stay with the institutiono Liabilities that would stay with the institution

under any circumstances;under any circumstances;

o Liabilities that runo Liabilities that run- -off gradually if problems arise;off gradually if problems arise;o That runo That run- -off immediately at the first sign of off immediately at the first sign of

problems.problems.

Liquidity Risk StrategyLiquidity Risk Strategy


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The liquidity strategy must be documented in aThe liquidity strategy must be documented in aliquidity policyliquidity policyThe institutions should formulate liquidityThe institutions should formulate liquidity

policies, recommended by senior policies, recommended by senior management/ALCO and approved by the Boardmanagement/ALCO and approved by the Boardof D irectorsof D irectorsTo be effective the liquidity policy must beTo be effective the liquidity policy must becommunicated down the line throughout in thecommunicated down the line throughout in theorganizationorganizationInstitutions should establish appropriateInstitutions should establish appropriateprocedures and processes to implement their procedures and processes to implement their liquidity policiesliquidity policies


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The key elements of any liquidityThe key elements of any liquiditypolicy include:policy include:

G eneral liquidity strategy (shortG eneral liquidity strategy (short- - and longand long- -term),term),specific goals and objectives in relation tospecific goals and objectives in relation toliquidity risk management.liquidity risk management.

Roles and responsibilities of individualsRoles and responsibilities of individualsperforming liquidity risk management functions.performing liquidity risk management functions.Liquidity risk management structure.Liquidity risk management structure.Liquidity risk management tools.Liquidity risk management tools.Contingency plan for handling liquidity crises.Contingency plan for handling liquidity crises.


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ALCO/ In estment CommitteeALCO/ In estment Committee

A sset Lia b ility Committee ( A LCO) comprised of senior management, A sset Lia b ility Committee ( A LCO) comprised of senior management,the treasury function or the risk management department the treasury function or the risk management department ..

Ideally, the ALCO should comprise of senior management from eachIdeally, the ALCO should comprise of senior management from eachkey area of the institution that manages liquidity risk.key area of the institution that manages liquidity risk.

members have clear authority over the units responsible for members have clear authority over the units responsible for executing liquidityexecuting liquidity- -related transactionsrelated transactionsThe ALCO should meet monthly, if not on a more frequent basis.The ALCO should meet monthly, if not on a more frequent basis.

Generally responsibilities of ALCO includeGenerally responsibilities of ALCO include D eveloping andD eveloping andmaintaining appropriate risk management policies and procedures,maintaining appropriate risk management policies and procedures,

MIS reporting, limits, and oversight programs. ALCO usuallyMIS reporting, limits, and oversight programs. ALCO usuallydelegates daydelegates day- -toto--day operating responsibilities to the bank'sday operating responsibilities to the bank'streasury department.treasury department.


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Liq uidity Risk ManagementLiq uidity Risk ManagementProcessProcess

An effective liquidity risk management An effective liquidity risk managementinclude systems to identify, measure,include systems to identify, measure,monitor and control its liquidity exposures.monitor and control its liquidity exposures.

Be able to accurately identify and quantifyBe able to accurately identify and quantifythe primary sources of a bank's liquiditythe primary sources of a bank's liquidityrisk in a timely manner.risk in a timely manner.

Always be alert for new sources of liquidity Always be alert for new sources of liquidityrisk at both the transaction and portfoliorisk at both the transaction and portfoliolevels.levels.


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Management Information SystemManagement Information SystemFor effective liquidity management decisions M ISFor effective liquidity management decisions M IS

is essential. Regular reports of the banks,is essential. Regular reports of the banks,Internal Reporting, Fund Flow Analysis Report,Internal Reporting, Fund Flow Analysis Report,Contingency Funding Plan Summary, andContingency Funding Plan Summary, andother bank reports are source of information for other bank reports are source of information for a bank.a bank.

L.R. Measurement and MonitoringL.R. Measurement and Monitoring

A n A n effective liquidity risk measurement andeffective liquidity risk measurement andmonitoring system not only helps in managingmonitoring system not only helps in managingliquidity in times of crisis but also optimize returnliquidity in times of crisis but also optimize return

through efficient utilization of available funds.through efficient utilization of available funds.


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I s a set of policies and procedures that serves as aI s a set of policies and procedures that serves as ab asic plan for a b ank to meet its funding needsb asic plan for a b ank to meet its funding needsin a Managing liquidity risk in a Managing liquidity risk

Use of CFP for Routine Liquidity Management:Use of CFP for Routine Liquidity Management: A reasona b le amount of liquid assets are A reasona b le amount of liquid assets aremaintained.maintained.Measurement and projection of funding Measurement and projection of funding requirements during various scenarios.requirements during various scenarios.

Management of access to funding sourcesManagement of access to funding sources ..

Contingency Funding PlansContingency Funding Plans


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Scope of CFP:Scope of CFP:

a)a) Analyzing and making quantitative Analyzing and making quantitativeprojections of all significant onprojections of all significant on- - and off and off

balancebalance- -sheet funds flows and their sheet funds flows and their related effects.related effects.

b )b ) Matching potential cash flow sources andMatching potential cash flow sources anduses of funds.uses of funds.

c)c) Establishing indicators that alertEstablishing indicators that alertmanagement to a predetermined level of management to a predetermined level of potential riskspotential risks

Contingency Funding PlansContingency Funding Plans


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Liq uidity Ratios and LimitsLiq uidity Ratios and LimitsBanks may use a variety of ratios to quantify liquidity. Ratios shouldBanks may use a variety of ratios to quantify liquidity. Ratios shouldalways be used in combination with more qualitative informationalways be used in combination with more qualitative information

Cash Flow Ratios and LimitsCash Flow Ratios and LimitsCash flow ratios and limits attempt to measure and control theCash flow ratios and limits attempt to measure and control the

volume of liabilities maturing during a specified period of time.volume of liabilities maturing during a specified period of time.

Liability Concentration Ratios and LimitsLiability Concentration Ratios and LimitsTo prevent a bank from relying on too few providers or To prevent a bank from relying on too few providers or funding sources.funding sources.

Other Balance Sheet RatiosOther Balance Sheet RatiosRatios used by financial institutions to monitor current and potentialRatios used by financial institutions to monitor current and potentialfunding levels.funding levels.


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Operati onal Risk Operati onal Risk ManagementManagement


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Operati onal Risk Management:Operati onal Risk Management:

Operational risk is the risk of loss resulting Operational risk is the risk of loss resulting from inadequate or failed internal from inadequate or failed internal

processes, people and system or from processes, people and system or fromexternal events. external events.

Reasons for operational risk Reasons for operational risk I mportance of Operational risk I mportance of Operational risk ExamplesExamples

O ti l Ri k M tO ti l Ri k M t


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Operati onal Risk ManagementOperati onal Risk Management

Principles of Operational Risk Management:Principles of Operational Risk Management:Ultimate accountability rests with the board ant transferredUltimate accountability rests with the board ant transferredfrom top to downfrom top to down

Ensure that there is an effecti e, integrated operational riskEnsure that there is an effecti e, integrated operational riskmanagement framework.management framework.

Board should recognize, understand and ha e defined allBoard should recognize, understand and ha e defined allcategories of operational risk applicable to the institutioncategories of operational risk applicable to the institution

All aspects of operational risk are managed should beAll aspects of operational risk are managed should bedocumented and communicateddocumented and communicated

All business and support functions should be an integral partAll business and support functions should be an integral partof framework.of framework.

E stablished processes for the identification, assessment,E stablished processes for the identification, assessment,

mitigation, monitoring and reporting of operational risk.mitigation, monitoring and reporting of operational risk.

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Board and senior managements o ersight:Board and senior managements o ersight:

a)a) The strategy given by the board of the bank.The strategy given by the board of the bank.

b) The systems and procedures to institute effective operational riskb) The systems and procedures to institute effective operational riskmanagement framework.management framework.

c) The structure of operational risk management function and the rolesc) The structure of operational risk management function and the roles

and responsibilities of individuals involved.and responsibilities of individuals involved.

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Risk Assessment and uantification:Risk Assessment and uantification:

Operational Risk assess and identify by bank inherentOperational Risk assess and identify by bank inherentin all material products, acti ities, processes andin all material products, acti ities, processes and

systems and ulnerability to these risks.systems and ulnerability to these risks.

Risk Monitoring:Risk Monitoring:

Regularly monitoring acti ities can offer the ad antage of q ualityRegularly monitoring acti ities can offer the ad antage of q ualitydetecting and correcting deficiencies in policies, procedures,detecting and correcting deficiencies in policies, procedures,and processes for managing operational risk.and processes for managing operational risk.



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Risk Reporting:Risk Reporting:The reporting system should be appropriate and it pro ide help toThe reporting system should be appropriate and it pro ide help to

monitor and control of the business.monitor and control of the business.

Establishing Control Mechanism:Establishing Control Mechanism:

The bank ha e formal framework that need to be reinforced throughThe bank ha e formal framework that need to be reinforced throughstrong culture. On the other hand the banks should ha e suchstrong culture. On the other hand the banks should ha e suchappropriate strategies to adjust their operational risks.appropriate strategies to adjust their operational risks.

Contingency planningContingency planning



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Contingency planning:Contingency planning:

The bank should ha e contingency plan to minimize their losses andThe bank should ha e contingency plan to minimize their losses andalso minimize business disruption.also minimize business disruption.


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Q uestionsQ uestions

final sif risk

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